On what basis is Irish residential property 26% undervalued?

The special report published this morning by the Central Bank of Ireland may well have perked up your spirits if you’re a homeowner inIreland. The Bank has calculated that residential property inIreland is between 12-26% undervalued – in other words you might think your home is worth €148,000 but the Bank thinks it should be worth up to €200,000. The Bank has even produced a graph – shown above – which shows the degree of undervaluation based on four different models.

But on what basis does the Bank arrive at its conclusions? Despite studying the 13-page report, I’m afraid the best you’re going to get, is the Bank has used four models to examine actual prices versus expected prices. The expected prices are derived from observations of property prices over the long-term and their relationship to various factors such as average income, population, housing stock and the availability of credit. It seems that on an “affordability” basis, the biggest undervaluation of 26% occurs.

How did they get to 26%? I have not a clue. You can’t tell what actual prices have been used. The CSO’s index is probably the most reliable in recent times but it only goes back to the mid 2000s but as noted in the Bank’s paper there is a range in actual house prices of between 43-70% recorded at Myhome, DAFT, the CSO and the Allsop Space auctions. So which actual house price has been used?

And how are the models constructed? Again, not a clue is offered by the paper, though there shouldn’t be any reason to doubt that the Bank staff have diligently carried out their calculations. On the other hand it’s worth noting that The Economist reported in November 2011 “despite their collapse, Irish home prices are still slightly above “fair” value—partly because they were incredibly overvalued at their peak, and partly because incomes and rents have fallen sharply.” – The Economist was using rents and income to come to its conclusions – you’d expect income used by The Economist and affordability as used by the Bank to throw up similar results though.

The Bank is being asked for its calculations as it is noted that the report states “Detailed econometric results are available, upon request, from the authors”

There will be cynics who will suspect any projections issued by the Central Bank of Ireland on property prices. There are some who will claim that the Bank made itself a hostage to fortune in March 2011 when it used baseline and adverse scenarios for future property prices to assist with estimating the capital requirements of banks. And cynics might suggest it is in the Bank’s own interest to undershoot the adverse estimate in order to avoid additional calls on taxpayers’ funds to prop up the banks.

Speaking of cynicism towards house prices forecasts, yesterday the Sunday Independent – “Ireland’s most profitable newspaper group” according to the Independent but a group which made a loss of €41m in 2011, is balance sheet-insolvent and has seen its share price dive by 66% in the past year according to everyone else – claimed that house prices in Dublin had “finally hit the floor” based on the monthly release of the CSO’s index during the week. If that is true, then Dublin house prices have “finally hit the floor” seven times since prices started declining from peak in 2007, and on each occasion after a rise, prices subsequently fell. For a media company starved of property advertising revenue, with negotiations with banks over €400m of debt looming and with circulation falling, you’d wonder if IN&M is reporting fact or merely composing a prayer.

32 Responses

Lovely news..Maybe Spring will arrive too.
Seriously though until they ban all new residential building for 5 years the supply overhang and the ability of the construction industry to add more to it will keep prices down.

They may as well have tossed darts at a board. The datum points are unstable so any results will be pure moonshine.
My best guess is that property was overvalued and the top to bottom will be 75-80%. More unless there is a good reason.

Oh, the only way those numbers make any sort of sense would be to include TWO incomes and in this climate doing that is ludicrous bordering on the delusional. Just how many police and nurses would need to couple up to get that sort of result.

The conclusion of this analysis is thrown into serious doubt, in my eyes snyway, the graph which suggests a maximum 20% over-valuation in 2007. That is nonsense.

It suggests to me that the CB has based its fundamental model of Irish house price values, at least in part, the post-1997 period when prices were inflated by underpriced EMU credit.

A realistic model of Irish house prices should be based on the pre-1997 period only, before cheap credit led to deviations from prior norms that later evolved into the fully-fledged bubble that peaked in 2007.

Because Ireland does not exist in a vacuum (unfortunately), it is useful to compare prices in other places.
If a house in Dublin (bad weather, no jobs) costs as much as a comparable house in San Francisco (sunshine, jobs) then something is wrong. Likewise Dublin should be cheaper than London, NY etc.
This is so simple maybe over elaboration has obscured it. It was only a dream when Dublin was more expensive than leading cities of the world, but that’s over now.
Dublin is overpriced,and leading cities of the world are still not recovering, some are still declining. So what hope for Dublin?
Or we could all pretend there Ireland does in fact exist in a vacuum

This report looks completely ridiculous especially because it givbes no details on their models and therefore no prospect of immediate rebuttal. Because of this the powers that be have got what they wanted. Front page headlines in all the newspapers sending an oversimplified load of tripe to the masses. Which they will no doubt swallow. Is this what Frank Daly was talking about when he talked of kicking a few tires? these guys are just beyond contempt. Everyone in their inner circle have a vested interest in increasing the property prices so forget the massive benefits affordable housing would have to economy in the long term for all the young people that could actually afford to buy a house for a reasonable price and in some way make up for all the debt overhang they will be inheriting.

These people are disgusting, they are prepared to sacrifice their own childrens future’s to make their own more comfortable.

@Eamon, the report offered to make the underlying “econometric” data available if the authors were contacted. A request was made to the Central Bank from here yesterday afternoon for the data which I hope can be hosted here if permission is obtained. However so far, there has been no response from the Bank to the request.

I’m sure the Bank has carried out its study diligently but we would all like to see the underlying data so as to better understand the conclusions.

But NWL, even if they they do provide the data now the damage has already been done. Front page headlines in many major newspapers. No rebuttal no matter how silly (out of context) these models may have been will get kind of coverage. In the property game all you have to do is change perceptions of the masses. Detailed well argued critique matters little, especially when it is not in the interests of the powers that be, as we found out during the Celtic Tiger. If you want to manufacture consent you need front page headlines.

In my day job, I sell Excel-based models for generating financial projections.

I am pleased to advise that I have used one of the models to generate proformas for a business which indicate that the business is significantly undervalued even though all its ratios etc. are very conservative and based on comparable international data. The only problem is that there is little demand for its offerings because of the uncertain economic outlook and prospective customers lack confidence and funding for purchases. Notwithstanding this, I’m going to issue a study paper and press release to say that the business is undervalued by 12-26%.

Reaching the “fundamentals”has now been quoted by Ronan Lyons on a recent Frontline programme and is now taken up by Irish independent.But of course no one has defined what the fundamentals are or on what they are based.We could also say as I have espoused in the past that the “fundamentals” of Property prices obtained from 1959 to 1996 when the average 3 bed semi was approx. 2.5 times the average industrial wage (i.e. the purchasing power required to buy a house).Today that would equate to €32,000 x 2.5 = €80,000.This,it is argued is the “fundamental” price a 3 bed semi should be and a long way off the €150,000 odd, price being quoted by various (vested?) interests currently.So it would appear (to me at least) that a fall of about 50% from current prices will leave prices at the “fundamental”.Of course as many commentators are now also saying(in which I am in agreement with) the overall state of the economy will dictate the pace and extent of the property crash over the next 4 years.With almost €13bn. to be taken out of the economy at around €3bn.per annum,what resources will be left to pay mortgages or indeed take out new ones even if they were available.

Be afraid,be very afraid these guys just purchased the old Anglo site from NAMA.Is it also 26% undervalued and instead of hanging around for a “healthier” economy will they pay the spread now.
Have they the skill set to bring in their new spanking headquarters in on time on budget,or can contractors expect 26% extra.Will they utilize the same models to value the completed building,any chance the CB can do an “analysis” on commercial,NAMA could do with all the help it can get,is Noonan STILL sitting on those accounts!!

@christy its a smokescreen the banks will need another bailout,residential property is ‘worth’ what someone is willing to pay for it.How do you add value to a house or apartment,new carpet and curtains ?

Deja vu all over again………….30 million and the stress tests are basically useless.
Sure why don’t we produce a few models and graphs,the Indo will lead the cheerleading,only need convince some of the people.

from China economic.net:
“The project’s investor is a Chinese development company, which is unwilling to reveal its name”.
Now there’s a way to start a relationship, should fit right in.
It will be.primarily, a giant food court with gambling, despite the grand vision.
Next time I am home I’ll know where to go for some chicken feet and mahjong,http://en.ce.cn/National/Politics/201202/21/t20120221_23090243.shtml
So much for investing in start ups and technology. The British are building one too, but turning a blind eye to gambling and corruption will make Athlone a sure winner.

Can the AIB debt solution,be applied to households?
The govt. has been choking for months now on modernizing BK laws,use the AIB solution.Allow,all households to hold their properties in LLC’s and instead of paying back the money just give AIB etc some worthless shares.

AIB just stiffed the taxpayer again,must not have the cash so another QUARTER BILLION BAILOUT or twice the household charge gone.

I agree with eamonn moran, I would suggest the central bank is working i cahoots with NAMA to falsely influence the property market again, as the banks did back in the first place in the late 1990’s early 2000’s, to help drive up the property prices. The normal rules of the open market will determine house prices – whatever people can afford to buy is what a property will be worth,not what NAMA or the central bank think or want it to be worth. I think NAMA is desperately scared of a more falls in prices, and also of commercial rents being reduced, due to their over-priced purchasing of the “distressed” builders properties. I feel that financial businesses like the central bank should not be allowed to commentate on the price of property as it not their stock in trade. They should keep their opinions to themselves and get on with doing what they are supposed to do which is controlling banking, and perhaps now go back to proper and correct banking methods to control money flow. AIB and BoI should also get their houses in order and get back to proper banking where you don’t lend people more money than they can afford to pay back. If properties are 26% lower than they should be then all well and good, let people get back to buying houses at sensible prices and let market forces determine how much houses are worth.

I take it neither of you has read anything substantial on the Europe China Trading Hub in Athlone. I’m not sure how this issue has come in to this thread but as someone who has followed the development closely, examined the planning application, and read the An Bord Pleanala inspector’s report today, I would like to note the following:

(a) There is no residential accommodation included in the development.

(b) Visitors will arrive by appointment only (not open to the public) and a maximum of 750 per day are scheduled to arrive daily. Athlone is a 2-hour coach journey from Dublin airport on the new motorway.

(c) No tax incentives have been offered for the development, unlike private hospitals, nursing homes, etc, so there is no loss of revenue to the State. No resources have been committed by the State or diverted from other uses. The local authority will get development levies if the project proceeds.

(d) International private equity will fund the development if it goes ahead. If these people want to pour money down a drain that is their prerogative. If the development goes ahead and is not a commercial success it would not be a disaster for the environment or other. The site is currently of relatively low agricultural value on the outskirts of Athlone and not of high amenity value either. It is well positioned close to the motorway though and could easily become a warehouse or light commercial centre if the Trading Hub failed. If even that failed well the site won’t go into NAMA or cost the taxpayer anything as you can be pretty sure no financing is being sourced from Irish banks.

In short, there are no downsides whatsoever to this development. Any other place in Ireland could have come up with this idea and I can think of much better locations for such a development. However, Athlone just happened to have some go-ahead developers who spotted an opportunity and were able to pull all the bits together. I don’t imagine there is anything stopping a similar proposal in any other part of Ireland if a group of people are able to acquire land and make the necessary connections in China. If the Athlone project succeeds it will bring high-spending international visitors into the country and throughout the year – not just in the summer tourist season. There are synergies with AIT locally which has a significant number of Chinese students.

I read the CB report last night (first time to read one of them – interesting read) and there is no reference at all to the recent property charge which I found strange, given it’s a precursor to a Property Tax? I would have thought that many who are holding off purchasing at the moment, would be awaiting the introduction of a Property Tax to assess it’s cost impact on a house purchase into the long term. Or perhaps a Property tax has no bearing on one’s propensity to purchase a house??

hi, I read this report and how they get to their observation is to ignore the historical data from 1996 & before & they say that as long as we do not get back to those relationships, the current data indicates the result. Ahh, the positions you can take with statistics and back them up.
With the LPT coming in & then water charges, any gains in housing imo will be given back in 2014. Mind you only good news is able to be reported upon at the mo.

Here is the relevant section : If, on the other hand, one regards the relationship between 1982 and 1995 as being more reflective of what the long run relationship between rents and house prices should be, then house prices still have some way to fall.

Reaching the “fundamentals”(insert “affordability”)has now been quoted by Ronan Lyons on a recent Frontline programme and is now taken up by Irish independent.But of course no one has defined what the fundamentals are or on what they are based.We could also say as I have espoused in the past that the “fundamentals” of Property prices obtained from 1959 to 1996 when the average 3 bed semi was approx. 2.5 times the average industrial wage (i.e. the purchasing power required to buy a house).Today that would equate to €32,000 x 2.5 = €80,000.This,it is argued is the “fundamental” price a 3 bed semi should be and a long way off the €150,000 odd, price being quoted by various (vested?) interests currently.So it would appear (to me at least) that a fall of about 50% from current prices will leave prices at the “fundamental”.(affordable)Of course as many commentators are now also saying(in which I am in agreement with) the overall state of the economy will dictate the pace and extent of the property crash over the next 3 years.With almost €11bn. to be taken out of the economy at around €3bn.per annum,what resources will be left to pay mortgages or indeed take out new ones even if they were available.